Generally, a surviving spouse may make a tax-free spousal rollover from a deceased spouse’s IRA only if the survivor is designated as the IRA’s beneficiary. However, in a private letter ruling (PLR), IRS said this general rule didn’t apply – and a tax-free spousal rollover was OK – where the decedent failed to designate an IRS beneficiary, died without a will, and the surviving spouse was the administrator and sole heir to the decedent’s estate.
Background on surviving spouse’s IRA choices. A surviving spouse designated as the beneficiary of an IRA need not leave the IRA in the decedent’s name. The surviving spouse can either:
1. Roll over the decedent’s IRA into an IRA in the spouse’s name (Code: Sec. 408(d)(3)(C)(ii)((), or
2. Elect to treat the decedent’s IRA as the spouse’s own IRA (Reg. §1.408-8, Q&A 5(a))
Observation. There is much to gain by choosing one of these options. For example, the surviving spouse can designate his or her own beneficiaries. And the surviving spouse can compute required minimum distributions as if he or she had funded the receiving IRA, generally resulting in a longer payout than would be the result if the surviving spouse were treated as the beneficiary (rather than the other of) the decedent’s IRA.
However, the regs say the election to treat the decedent’s IRA as the surviving spouse beneficiary’s IRA is available only if the spouse is “the sole beneficiary” of the IRA and has an unlimited right to withdraw amounts from it. The sole beneficiary requirement is not met if a trust is named as the IRA’s beneficiary, even if the spouse is the sole beneficiary of the trust. (Reg. §1.408-8, Q&A 5(a)).
Background on IRA rollovers. There is no immediate tax if distributions from an IRA are rolled over to an IRA or other eligible retirement plan (i.e., qualified trust, governmental Code Sec. 457 plan, Code Sec. 403(a) annuity or Code Sec. 403(b) tax-sheltered annuity). For the rollover to be tax-free, the amount distributed from the IRA generally must be recontributed to an IRA or other eligible retirement plan no later than 60 days after the date that the taxpayer received the withdrawal from the IRA. (Code Sec. 408(d)(3)) A distribution rolled over after the 60-day period generally will be taxed (and also may be subject to a 10% premature withdrawal penalty tax). (Code Sec. 72(t)) Under Code Sec. 408(d)(3)(B), an individual is permitted to make only one nontaxable 60-day rollover between IRAs in any 1-year period.
Background on inherited IRAs. In the case of an inherited IRA, Code Sec. 408(d)(3) does not apply to any amount received by an individual from such an account, and the inherited account is not treated as an IRA for purposes of determining whether any other amount is a rollover contribution. (Code Sec. 408(d)(3)(C)(i)) An IRA is treated as inherited if the individual for whose benefit the account is maintained acquired the account by reason of the death of another individual, and that individual was not the surviving spouse of such other individual. (Code Sec. 408(d)(3)(C)(ii))
Facts. Decedent B established an IRA but failed to designate a beneficiary for the account. The IRA was maintained by a custodian that provided that if no beneficiary is designated for the IRA, the account balance remaining at B's death is payable to her estate. B died without a will and, under relevant state law, Taxpayer A, as B's surviving spouse, is the sole heir to B's estate. Taxpayer A is also the sole administrator of the estate.
Taxpayer A intends to distribute the IRA to the estate, and as an administrator of B's estate, he will pay the proceeds of the IRA to himself. Within 60 days of receipt, A will roll over the proceeds of the IRA into one or more IRAs in his own name.
Rulings requested. Taxpayer A asked IRS to rule that:
1. He will be treated, for purposes of Code Sec. 408(d)(3), as the payee or distributee of the IRA proceeds;
2. The IRA won't be treated as an inherited IRA within the meaning of (Code Sec. 408(d}(3)(C); and
3. He will be eligible to do a tax-free 60-day rollover from the decedent's IRA to his own IRA.
Favorable rulings. The PLR points out that, generally, Taxpayer A, as the surviving spouse of Decedent B, would not be permitted to treat the IRA as his own, because he was not named the beneficiary of the IRA. However, because Taxpayer A is the administrator and sole heir to Decedent B's estate, for purposes of applying Code Sec. 408(d}(3)(A) to the IRA, he is effectively the individual for whose benefit the account is maintained. As a result, if Taxpayer A receives a distribution of the proceeds of the IRA, he may roll over the distribution into his own IRA.
In response to the ruling requests, IRS concluded that: Taxpayer A will be treated, for Code Sec. 408(d)(3} purposes, as the payee or distributee of the proceeds from the IRA; that the IRA won't be treated as an inherited IRA; and that Taxpayer A will be eligible to make a tax free rollover of the proceeds from B's IRA to an IRA set up and maintained in his own name, as long as the rollover occurs no later than 60 days after the proceeds are received by Taxpayer A in his capacity as administrator of Decedent B's estate, and all other applicable Code Sec. 408(d)(3) requirements are satisfied.
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